William Norton: How we could share the proceeds of thrift

William Norton is a solicitor.  He has been an adviser on tax affairs and legislation to the Conservative frontbench and was a member of the permanent staff of the James Review on Taxpayer Value between 2004 and 2005. William was also the referendum agent for the victorious No campaign in the North East Regional Referendum and is currently a trustee of the Social Affairs Unit and a borough councillor in Worcestershire.

As the UK enters a painful recession, millions of Britons will be forced to tighten their belts.  We cannot afford to carry the cost of an extravagant and ineffective Government which squanders cash and does not understand how to spend other people’s money.

A serious administration which genuinely cut politicians’ waste would need lower borrowing and so could afford more effective measures for an earlier recovery.  I call this “Sharing the Proceeds of Thrift”.

In a new report to be published tomorrow by the TaxPayers' Alliance, Paying for the Credit Crunch - now available to download as a pdf - I outline how much waste there is in the public sector, and how it can be cut.  My assessment is that the Government is wasting about 15p in every £1 it spends.  That may not sound like much but, when Gordon Brown is planning to spend well over £600 billion per year of your money, that adds up to a lot of 15ps.  Waste in total exceeds £100 billion.

Oh, politicians always promise to cut waste, but they never do; it’s impossible.

Such defeatism is part of the problem.  The other main problem is a failure to understand “waste” itself.  The debate has focused on the extremes.  Either government policies have been attacked as wrong or unnecessary (which encourages the view that waste is an all-or-nothing thing; that if you like the policy, or can’t stomach a fight to reverse it, you have to put up with all of the cost) or it has concentrated on spectacular one-off cock-ups like the Millennium Dome (and you can’t un-waste any money by un-building the Dome).

Waste is best regarded as avoidable expenditure: money you don’t need to spend.  There are two basic forms.  Structural Waste, caused by political stupidity, is cost created by an inherently wasteful machinery of government; and Operating Waste, caused by administrative incompetence, is cost created by an inefficient way of going about your business.  Structural Waste is like a car that’s expensive because it has a low mileage to the gallon while Operating Waste is like a car that you’ve just driven into a brick wall.

Structural Waste is currently running at about £55-60 billion.  For that sort of money you could hold a banking bailout every year, or fight at least ten Iraq wars.  It can all be eliminated – if you choose.

This is because Structural Waste arises either because of government policy or because of the processes of government itself.  How you categorise the waste determines how much of it can be cut.  A good example here is the eight Regional Development Agencies (RDAs).

If you regard RDAs as a bad policy altogether, then you can close them down completely and save about £2 billion (or spend it elsewhere).

However, even if you quite like the idea of RDAs, it is possible to analyse their expenditure line-by-line.  About 75% goes on programmes such as infrastructure, regeneration, skills etc which either already is passed on to another quango or could be easily reassigned to an existing public body.  That leaves 15% of their budgets taken up by non-programme staff and admin costs and 10% which is spent on boosting “regional pride” or supporting other regional bodies.  So 25% of their budgets are incurred just because someone decided to set up regional quangos.  If you decide that you don’t need RDAs, you can still keep the same front-line programmes and save £500 million.

Operating Waste is currently running at about £45-£50 billion.  In fairness, this cannot be eliminated in its entirety.  Any organisation, let alone one that spends £600 billion and employs 2 million pen-pushers, is going to make mistakes.  But these mistakes can be minimised by smarter methods of working.  The classic example here would be the mis-handling of major defence procurement projects, which routinely overrun in both time and cost, forcing the MOD to clawback cash by reducing the amount and standard of the equipment it eventually acquires.

This highlights why waste has to be cut.  A reformed machinery of government is not only cheaper, but will provide better public services.  When the MOD makes a procurement cock-up, someone in Whitehall gets a knighthood, but someone in Helmand gets a bullet.

At a time when the national debt is set to balloon to over £1 trillion, and the Government is proposing to borrow more money in real terms than was needed to finance the defeats of Napoleon, or the Kaiser, or Hitler, we have to cut the running costs of government in order to be sure we can keep open the schools, the hospitals and the other essential public services.  We can’t afford to go on like we are.

Ah, says the critic, but we’re in a recession.  It would be dangerous to cut government spending at this time.

Not so.  The waste in question is not vital investment needed to kick-start recovery.  It’s re-directed consumption spending financed by taking money from the public, preventing them making their own consumption spending.  If we’re not getting value for this expenditure, it will probably slow down the recovery.  When Keynes advocated public works programmes, say spending £1 million on a new railway or whatever, he expected to get a railway worth about £1 million.  I don’t think he expected to get a tribe of ethnic diversity monitors or an army of people telling us to eat five pieces of fruit.

As I set out in my report, a policy of Sharing the Proceeds of Thrift will pay substantial dividends.  Starting with Gordon Brown’s own expenditure plans, and making pessimistic assumptions about the time required to eliminate Structural Waste and the ability to reduce Operating Waste, a serious cost-cutting government could still make enough savings to afford:

• A National Insurance cut, which would do more good to stimulate recovery than the current VAT reduction;
• A small tax-incentive for savers, to reward people who do the right thing;
• A return to a balanced budget several years earlier than Alistair Darling expects.

What’s not to like about that?